Lonsdale Property Development Ltd v The Commissioners for HMRC

This appeal concerns whether HMRC’s decision to issue a Notice of Requirement (“NoR”) to provide security in respect of Value Added Tax (“VAT”) and Construction Industry Scheme (“CIS”) deductions was reasonable and necessary.

The Appellant (‘Lonsdale Property Development Limited’) appeals against HMRC’s decisions to issue two NoRs, dated 20 May 2024:

The NoRs were served at the Appellant’s Principal Place of Business (“PPOB”), with copies sent to both directors (Mr David Lonsdale and Mr Thomas Raffe). On 31 May 2024, Mr Raffe resigned his directorship at the company. The NoRs were upheld by the review letters dated 1 August 2024.

In respect of the appeal against the NoR for Pay-As-You-Earn (“PAYE”)/National Insurance Contributions (“NICs”) (“the PAYE NoR”), the letter attached to the notice of appeal is a warning letter and is not an appealable decision. (Footnote: ¹)

HMRC submit that the Appellant’s failure to pay the VAT and CIS deduction amounts due in full, and on a regular basis over an extended period of time, justifies HMRC’s decision to deem the Appellant’s to be a risk to the Revenue. HMRC further submit that their actions to require security are reasonable and fall within the powers set out at para. 4(2)(a) of Schedule 11 of the VATA and para. 17B of the CIS Regulations.

The Appellant submits that the security amounts have been paid in full and there is no risk that they will not be paid on time in the future. The Appellant further submits that the Tribunal should consider the reasonableness of the review decision, and not just the decision by the original decision-maker.

Having carefully considered the evidence and the submissions made by both parties, we dismiss this appeal. In this Decision, the legislation and case law are cited so far as relevant to the issues in dispute. Our conclusions regarding the key submissions made by the parties are set out below.

The issue in the appeal is whether HMRC’s decision to issue the NoRs was “reasonable and necessary for the protection of the Revenue”.

The burden of proof is on Appellant to show that HMRC acted unreasonably in deciding to require security. This means that the Appellant must prove that HMRC could not reasonably have arrived at the decision.

The standard of proof is the ordinary civil standard; that of a balance of probabilities.

The authorities to which we were specifically referred by the parties were:

The documents to which we were referred were included in the Hearing Bundle consisting of 195 pages.

Mr David Lonsdale is the director of the Appellant company.

The Appellant has two businesses. The first is small scale property development and refurbishment, developing and refurbishing residential properties which are owned by Mr Lonsdale, and which he wishes to sell. Sometimes work is done for private clients who are known to the directors. The second is the running of pubs, namely:

On 16 December 2022, a VAT warning letter was issued to the Appellant, as the Appellant was non-compliant with its VAT liabilities,

On 5 June 2023, a NoR for VAT was sent to the Appellant.

On 11 August 2023, an independent review in relation to the NoR was upheld. The Appellant then submitted an appeal to the Tribunal

On 22 September 2023, the VAT NoR was withdrawn. Officer Lowery (the decision-maker) then found that the Appellant had failed to pay the 09/23 VAT return on time, and in full, after the NoR was withdrawn. At the time of withdrawing the VAT NoR, HMRC noticed that the Appellant had started to accrue debt on PAYE and CIS, so the risk to HMRC had not been fully eliminated but only potentially moved to another Head of Duty (“HoD”). Therefore, Officer Lowery monitored the Appellant’s compliance behaviour over a period of time to assess if the Appellant was at risk of failing to pay its VAT liabilities, and if a security was required.

On 15 February 2024, the Appellant’s 12/23 VAT return remained unpaid and the PAYE/NI and CIS accounts were also in debt. Officer Lowery then reviewed the Appellant’s account and found that the Appellant had made payments in November and December 2023, which partially paid the 12/23 VAT return. The VAT debt at that time included the 03/24 VAT return. The Appellant therefore remained a risk to the Revenue.

On 26 March 2024, new warning letters for VAT, PAYE and CIS were issued by post to the Appellant in order restart securities action again.

On 9 April 2024, Officer Lowery called the Appellant and spoke to Mr Lonsdale. Mr Lonsdale stated that he had not seen the warning letters, but would go to the business premises and pick them up. He also stated that he was awaiting the sale of some properties, which would allow him to clear the debts.

On 23 April 2024, Officer Lowery telephoned the Appellant again and spoke to Mr Lonsdale. Mr Lonsdale stated that he had seen, and understood, the warning letters. He also stated that the sale of three properties was nearing completion, and the debt would be cleared.

On 16 May 2024, HMRC reviewed the case and noted that no payment had been made since 11 December 2023, and that a VAT debt of £46,582.34 had risen. The current CIS debt had risen to £110,675.15.

On 20 May 2024, Officer Lowery issued the VAT NoR and the CIS NoR.

On 18 June 2024, the Appellant requested a review of the decision.

On 28June 2024, completion took place on the sale of the properties and Mr Lonsdale transferred the money to the Appellant the following working day (which was 1July 2024).

During the review period the Appellant paid the debts on their VAT and CIS accounts in full (by 9 July 2024).

On 1 August 2024, HMRC issued review conclusion letters in relation to the VAT NoR and CIS NoR. With regard to the VAT NoR, the original decision to require security was upheld but because the debt had been cleared, the decision-maker had indicated a willingness to reduce the security amount. With regard to the CIS NOR, the decision to require security was upheld and the amount reduced to reflect the fact that the current CIS liabilities had been paid in full.

On 29 August 2024, the Appellant appealed to the First-tier Tribunal (‘FtT’).

In order to put the parties’ respective contentions into context, we start with the relevant statutory provisions. The relevant law, so far as is material to the issues in this appeal, is as follows:

The law relating to payment and recovery of VAT in the United Kingdom is contained in VATA, which was intended to reflect the provisions of certain EC Directives. The relevant EU legislation is contained in Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (“the First Directive”) and Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the member states relating to turnover taxes - Common system of value added tax: uniform basis of assessment (“the Sixth Directive”), as amended by Council Directive 95/7/EC of 10 April 1995. The provisions of the Sixth Directive, as amended by the Invoicing Directive, were replaced by EC Council Directive 2006/112/EC, which is known as the Principal VAT Directive (“thePVD”). The current EU provisions relating to VAT and the recovery of input tax are contained in the PVD, which is the source of legislation concerning VAT.

VAT is payable by a taxable person carrying out a taxable supply of goods or services: art. 93 PVD. A ‘taxable person’ is defined as any person who carries out, in any place, any economic activity, whatever the purposes. VAT is charged on “supplies” of goods and services for “consideration”: art. 2(1). VAT becomes chargeable when a supply takes place: art. 63.

Article 73 of the PVD, reflected in s 19 VATA, defines, so far as relevant, the taxable amount as:

“in respect of the supply of goods or services … everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, …”

Article 167 of the PVD provides that:

“A right of deduction shall arise at the time the deductible tax becomes chargeable.”

Article 168, reflected in ss 24(1), 24(2), 26(1) and 26(2) VATA, allows a taxable person the right,

“[i]n so far as the goods and services are used for the purposes of the taxed transactions of a taxable person”, to deduct VAT due or paid “in respect of supplies to him of goods or services carried out or to be carried out by another taxable person.”

Every taxable person who carries out supplies of goods or services in respect of which VAT is deductible must be identified by an individual number: art. 214 PVD.

The PVD was transposed into domestic law by VATA. Articles 14(1) and 24 of the PVD, reflected in s 5, Schedule 4, VATA, define the concepts of “supply of goods” and “supply of services” respectively, in the following terms;

“‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.”

“‘Supply of services’ shall mean any transaction which does not constitute a supply of goods.”

The provisions of VATA must be interpreted, as far as possible, so as to comply with the PVD.

Section 4 provides that:

“(1)

VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

(2)

A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.”

Section 5(2) provides, inter alia, that:

“(a)"supply" in this Act includes all forms of supply, but not anything done otherwise than for consideration;

(b)

anything which is not a supply of goods but is done for a consideration…is a supply of services.”

Section 24(1) defines “input tax” as, inter alia:

“VAT on the supply to [a taxable person] of any goods or services” which are “used or to be used” for a business “carried on by him.”

Section 25(2) entitles a taxable person to “deduct” “so much of his input tax as is allowable under” s 26 “from any output tax that is due from him”.

Section 26 (1) and (2) provide that the amount of allowable input tax is that which is “attributable to” … “supplies … made or to be made by the taxable person in the course or furtherance of his business” - [including] taxable supplies.

Section 25(1) VATA requires a taxable person to account for, and pay, VAT for a prescribed accounting period at such a time, and in such manner, as determined by regulations. Those regulations are the VAT Regulations 1995 SI 1995/2518 (“the VAT Regulations”).

Regulation 25(1) of the VAT Regulations provides that a return must be submitted to HMRC by no later than the last day of the month following the end of the period to which it relates.HMRC have discretion, under reg. 25A (20) and reg. 40 of the VAT Regulations, to allow extra time for the filing of a return and the making of payment where these are carried out by electronic means.

Paragraphs 4(1A) and 4(2) of Schedule 11 VATA provide HMRC with the power to require a security. The statutory provisions are as follows:

“4(1) The Commissioners may, as a condition of allowing or repaying input tax to any person, require the production of such evidence relating to VAT as they may specify.

4(1A) If they think it necessary for the protection of the revenue, the Commissioners may require, as a condition of making any VAT credit, the giving of such security for the amount of the payment as appears to them appropriate.

4(2) If they think it necessary for the protection of the revenue, the Commissioners may require a taxable person, as a condition of his supplying or being supplied with goods or services under a taxable supply, to give security, or further security, for the payment of any VAT that is or may become due from–

(a)

the taxable person, or

(b)

any person by or to whom relevant goods or services are supplied.”

VATA and the VAT Regulations are EU-derived domestic legislation, as defined by s 1B(7) of the European Union (Withdrawal) Act 2018 (“the Withdrawal Act”). Section 2 of the Withdrawal Act provides that EU-derived domestic legislation, as it had effect in domestic law immediately before IP-completion day (i.e., 31 December 2020), continues to have effect in domestic law on and after that day.

The “right of appeal” to the FtT is governed by s 83, which includes a list of matters in respect of which a right of appeal is available. The scope of the appeal right, as well as the jurisdiction of the Tribunal, differs between the various matters listed therein. Section 83(1)(l) VATA provides appeal rights against the requirement of any security under para. 4(1A) or (2).

Part 3A of the CIS Regulations provides for security for payments to HMRC. Paragraph 7B provides that:

“In circumstances where an officer of Revenue and Customs considers it necessary for the protection of the revenue, that officer may require a person described in regulation 17C(1) to give security for the payment of amounts in respect of which the contractor (“C”) is, or may be, accountable to HMRC under either section 61 (deductions on account of tax from contract payments) of the Act or these Regulations.”

Paragraph 17C(1) of the CIS Regulations details which entities are required to pay security.

The documents for the hearing, set out at [12] above, comprised pleadings and appeal correspondence. We heard oral evidence from Mr Lonsdale and from Officer Lowery (the decision-maker). We did not hear from Officer Ashton (review officer), who was not in attendance, and also did not hear from Mr Raffe (who was in attendance but had submitted a witness statement). We considered the evidence to be of benefit to us in understanding the background to these proceedings and have considered any key points of disagreement in determining the facts as set out below. We will refer to the evidence given by Mr Lonsdale in our “Discussion” below.

Ms Donovan submits (in summary) that:

Mr Lonsdale (on behalf of the Appellant) submits (in summary) that:

Mr Lonsdale referred to the case of Southend No. 2 in support of the submission that the Tribunal should consider the information that was available to the review officer when the review decision was made, and not just the decision itself (i.e., the whole decision-making process). HMRC had only referred to the decision in Southend in the Statement of Case.

At the conclusion of the hearing, we reserved our decision, which we now give with reasons. In reaching our decision, we have considered all of the evidence - both oral and documentary - whether we refer to it specifically, or not.

The underlying/background facts are not in issue between the parties. We, therefore, adopt the “Background Facts at [13] to [28] above as our “Findings of Fact”.

The Appellant appeals against HMRC’s decisions to issue a VAT NoR and a CIS NoR in order to protect the Revenue.The statutory obligations in respect of VAT and CIS are clear. As can be gathered from the legislation, VAT is a tax that is imposed on the supply of goods or services in the United Kingdom made in the course of a business carried on by the taxpayer. The tax is imposed by VATA. The taxpayer who makes a taxable supply becomes liable to pay the output tax on the supply to HMRC. The legislation makes clear that there is a statutory obligation to both file a VAT return and pay VAT on time. In the words of Judge Colin Bishopp in R & C Comrs v Enersys Holdings UK Ltd [2010] UKFTT 20 (TC) (‘Enersys’), at [33]:

“…The legislation draws the clear line at a calendar month after the end of the prescribed period… the obligation requires no more than that the return and payment are received not later than the due date.”

The obligation on a trader is to submit payment no later than the statutory due date. There is a public interest in the timely payment of taxes. The scheme of collection of VAT involves a trader having received the amount of tax which s/he must subsequently pay over to HMRC. In C & E Comrs v Salevon Ltd; C & E Comrs v Harris & Anor [1989] STC 907, Nolan J said this (in the context of the Finance Act 1985):

“…There is nothing in law to prevent him from mixing this money with the rest of the funds of his business and using it for normal business expenses (including the payment of input tax), and no doubt he has every commercial incentive to do so…But by using it in his business he puts it at risk. If by doing so he loses it, and so cannot hand it over to the commissioners when the date of payment arrives, he will normally be hard put to invoke s 19(6)(b).”

We are satisfied that the tax which is collected by a trader represents something similar to an interest-free loan from HMRC.

The CIS is a tax compliance scheme for businesses operating in the construction industry. The CIS scheme is contained in the Finance Act 2004 (“FA 2004”) and is a tax deduction scheme (PAYE and NICs) where tax is deducted at source from payments which relate to work within the construction industry. Under the CIS, a contractor is required to send a return of payments made to sub-contractors for each tax month: s 70 FA 2004 and reg 4 of the CIS Regulations. It is the contractor’s responsibility to file, and pay, CIS tax as when itbecomes due; which is the 22^nd day of the month to which the return relates.

There is, therefore, a statutory duty to make payment on time.

Under the Taxes Acts, a company may be required to file returns for several HoDs. Where returns have not been made, or returns have been made but remain unpaid, HMRC have the power to request security. A security is an amount of money that HMRC requires a business to pay because HMRC believe the business may not pay its VAT or other taxes. HMRC will seek security only where there is serious risk to the Revenue, or where there is a history of non-compliance, and will do so reasonably and proportionately. Such securities may be used to pay any arising debts in the specific HoD to which the security relates. These are held for specified periods and, at the end of that period, any balance is repaid. For LLPs and limited companies, directors and other company officers can be included as being required to pay towards the security for the company.  The amount of security required is based upon an average of six months’ VAT and CIS payable by the company, plus any debts outstanding at the time the NORs were issued.

Paragraphs 4(1A) and 4(2) of Schedule 11 VATA (supra) provide HMRC with the power to require a security in relation to VAT. HMRC may also issue a security if an HMRC officer considers that this is necessary to protect the CIS deductions which a contractor is, or may be liable, to pay. The law that allows HMRC to require security to be given for CIS is contained in Part 3A of the CIS Regulations.It was not in dispute that HMRC had the power to require security in the appeal before us. It was further not in dispute that the Appellant had accumulated debts, save that the parties differ in view as to whether the security should have been required.

The nature and scope of the right of appeal to the FtT, as accepted by both parties, is against the decision on the issue of requiring a security. In appeals against a decision to require security, the FtT’s jurisdiction is confined to reviewing the reasonableness of HMRC’s decision. The FtT is not entitled to come to its own decision in relation to the current evidence, and is further not entitled to substitute its own decision. The jurisdiction is, therefore, supervisory.

In relation to the exercise of a statutory discretion and the issue of ‘reasonableness’, in Associated Provincial Picturehouses Ltd v Wednesbury Corporation[1948] 1 KB 223, [1947] 2 All ER 680 (‘Wednesbury’), Lord Greene MR said this:

“We have heard a great deal about the meaning of the word "unreasonable". It is true that the discretion must be exercised reasonably. What does that mean? Lawyers familiar with the phraseology commonly used in relation to the exercise of statutory discretion often use the word "unreasonable" in a rather comprehensive sense. It is frequently used as a general description of the things that must not be done. For instance a person entrusted with a discretion must direct himself properly in law. He must call his own attention to the matters which he is bound to consider. He must exclude from his consideration matters which are irrelevant to the matter that he has to consider. If he does not obey those rules, he may truly be said, and often is said, to be acting "unreasonably".”

Pursuant to C & E Comrs v JH Corbitt (Numismatists) Ltd2 WLR 653;[1980] STC 231 (‘JH Corbitt (Numismatists’), a decision is not reasonable if (a) the decision maker acted in a way which no reasonable decision-maker could have acted; (b) they had taken into account some irrelevant matter; or (c) had disregarded something to which they should have given weight.

The material to be considered is that which was available at the time of the relevant decision.In C & E Comrs v Peachtree Enterprises Ltd [1994] STC 747 (‘Peachtree’), At 751 Dyson J acknowledged that the conclusion “offends common sense” but observed that:

“As soon as the Tribunal considers the effect of matters which the decision-maker did not take and could not have taken into account, the Tribunal is abandoning its supervisory or reviewing role and assuming the mantle of administrative decision maker.”

Dyson J, nevertheless, also held (at 753) that:

“If after a requirement has been made…fresh material comes to light or into existence which the taxpayer considers justifies a modification of the requirement, the taxpayer may ask the commissioners to reconsider the matter. The commissioners have a duty to reconsider in light of the fresh material in those circumstances. The taxpayer can appeal the commissioners’ decision following the reconsideration.”

The supervisory jurisdiction of the FtT in the circumstances of this appeal was explained in John Dee. The case concerned an appeal in which the then VAT Tribunal had concluded that the Commissioners had failed to have regard to additional material relating to the appellant’s financial circumstances. Neil LJ (with whom the other Lords Justices agreed) held that the appellant had been right to concede that:

“where it is shown that, had the additional material been taken into account, the decision would inevitably have been the same, a tribunal can dismiss an appeal.”

Neil LJ also held that:

“It seems to me that the ‘statutory condition’ which the tribunal has to examine in an appeal is whether it appeared to the Commissioners requisite to require security. In examining whether that statutory condition is satisfied the tribunal will consider whether the Commissioners had acted in a way in which no reasonable panel of Commissioners could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight”

No distinction is made, as a matter of principle, between that situation (taking account of relevant material that was not originally taken into account) and a case where irrelevant material ought not to have been taken into account. In reaching a conclusion that the relevant decision would inevitably be the same, the FtT may well consider the evidence from the decision-maker and whether it would have decided the matter in the same way.

In GB Housley Ltd v HMRC [2014] UKUT 320 (TCC), at [11], the Upper Tribunal (‘UT’) said this:

“11.

Since the tribunal’s jurisdiction is only supervisory, it follows that if HMRC have not exercised their discretion properly (including by failing to exercise it at all) the result is that the exercise of the discretion must be revisited. However, there is an exception where HMRC are able to show that, had the discretion been properly exercised, the decision would inevitably have been the same: see again John Dee Ltd [1995] STC 941 at 952 to 953 and Best Buy Supplies Ltd at [50] to [56].”

The following decisions are FtT decisions which, though not binding on us, adequately reflect the law in relation to the supervisory jurisdiction of the FtT in the circumstances of this appeal:

In Sanleo Ltd & Zonin Restaurants Ltd v HMRC [2010] UKFTT 266 (TC) (‘Sanleo’), Lady Mitting said this:

“18.

The jurisdiction of the tribunal is supervisory only.  It is not open to us to substitute our own decision for that of the Commissioners.  We test whether or not the Commissioners have taken into account all relevant material or indeed whether they have taken into account something which is not relevant.  We look at the weight attached to such material and whether any error of law has been made.  In the light of all of this we then ask ourselves whether or not the decisions reached by the Commissioners are ones which no reasonable body of Commissioners could have reached.

19.

The tribunal is only able to look at facts and material which existed at the time the decisions were made.  For this reason we are not able to take any account of the current financial position of the two Appellant companies.”

In Southend, Judge Bishopp stated, at [10], that:

“It is undisputed that our jurisdiction is supervisory only. That is, if we are to allow the appeal we must be satisfied that the decision is one at which the Commissioners could not reasonably have arrived. That understanding of the law derives from the judgments of Farquharson J in Mr Wishmore Ltd v Customs and Excise Commissioners [1988] STC 723 of Dyson J in Customs and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747 and the Court of Appeal in John Dee Ltd v Customs and Excise Commissioners [1995] STC 941. The cases show that we must limit ourselves to a consideration of the facts and matters which were known when the disputed decision was made, so we cannot take account of developments since that time, and that we may not exercise a fresh discussion. In other words, if the decision was flawed we must allow the appeal and leave HMRC to make a further determination if they so choose. If we are persuaded the decision was flawed but that, had HMRC approached the matter correctly, they would have inevitably arrived at the same conclusion we should dismiss the appeal”.

Similarly, in D-Media Communications v HMRC [2016] UKFTT (TC) (‘D-Media’), at [18], the FtT said this:

“18.

It is clear that, in relation to security for VAT, the jurisdiction of the tribunal is supervisory only (John Dee Ltd v Customs and Excise Comrs [1995] STC 941). Thus, on such an appeal, the task of the tribunal is to consider whether HMRC had acted in a way in which no reasonable panel of commissioners could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight. In doing so, the tribunal is confined to considering facts and matters which existed at the time HMRC made their decision (Customs and Excise Comrs v Peachtree Enterprises Ltd [1994] STC 747). The tribunal might also have to consider whether the Commissioners had erred on a point of law. The tribunal cannot, however, exercise a fresh discretion; the protection of the revenue is not the responsibility of the tribunal or the court. If the decision is found to have been flawed, the appeal will be allowed, and HMRC may make a further determination if they so choose.”

We bear in mind the point made in D-Media, at [21], that the FtT is entitled to form its own view as to:

We also bear in mind that, as set out in John Dee, where it is shown that had the additional material contended for been taken into account, the decision would inevitably have been the same, a tribunal can dismiss an appeal.

The main basis of the argument advanced by Mr Lonsdale was that the review officer failed to take into account the fact that the debt had been paid in full at the time that the review decision was made. In this respect, he relies on the decision in Southend No. 2, where Judge Richard Chapman QC said this:

“46.

I find that the reasonableness of the whole decision-making process, including the review officer’s decision, must be taken into account. It remains the case that the decision which is being appealed is the notice of the requirement to give security for PAYE and NIC. However, that decision is as varied or supplemented by the review decisions. This therefore means that the reasonableness of the Notices is to be considered taking into account the information available at the time of the review decision and the decision-making process as a whole including the review decision.

…

50.

Fourthly, the fact that it is the Notices which constitute the decisions appealed against does not mean that those Notices exist in a vacuum or cannot take into account the review. Instead, where the review amends or varies (either in its own right or requiring a further process to amend or vary) the substance or reasoning for the Notices, the Notices take effect as amended or varied by the review decisions. Indeed, in the present case, the Notices were varied by the review (or at least the variations offered were confirmed by the Notices).

…

60.

I find that (in the same way for VAT as for PAYE and NIC) the reasonableness of the whole decision-making process, including the review officer’s decision must be taken into account. I agree with Mr Barrett that NT Ada is authority for the proposition that the review process is separate from an assessment decision and that it is an assessment decision which is being appealed. On the face of it, a decision to issue a notice of requirement to provide security is to be treated in the same way for these purposes as an assessment. However, I repeat paragraphs 50 to 53 above. Again, I agree with the Tribunals in Sanleo and Bluechipworld at [20] and [29] respectively to the effect that whilst the decision appealed against is the original notice, the whole decision making process is to be taken into account and so the appeal is against the original notice as it stands in the light of the review.

…

67 …The review letters themselves set out the reasoning for the decisions. Insofar as the review letters do not place any greater weight on one or more of the factors referred to within them, in the circumstances of the present case none is to be given any particular priority and each of the matters referred to in the review letters is to be taken as having had a material effect on the respective decision.”

In Bluechipworld Sales & Marketing Ltd v HMRC [2019] UKFTT 705 (TC) (‘Bluechipworld’), Judge Bedenham, similarly, stated at [29] and [30], that:

“29.

We reject HMRC's submission that, even where there has been a review of a decision to require security, the relevant decision for the purpose of an appeal remains the decision as originally made. Such an approach is not consistent with the statutory provisions (certainly in relation to VAT) which provide that on review any further representations provided since the original decision should be considered and that the deadline for an appeal is 30 days after the review has been concluded. Further, such an approach as contended for by HMRC is illogical in that it is the review decision that is HMRC's ‘last word’ and it may be that HMRC's position/reasoning on review is considerably different to that expressed originally - in those circumstances it would be nonsensical for an appeal to focus solely on the original decision. In our view, the Tribunal needs to consider the decision as it stands following the review. In some cases the review decision will in effect have superseded the original decision, in other cases the original decision and the review decision will need to be considered cumulatively (this was the approach adopted by Lady Mitting in Sanleo Ltd & Zonin Restaurants Ltd v HMRC [2010] UKFTT 266 (TC)).

30.

We note that on the facts of this case, if the approach in Pachangas is correct, the original decision (considered on its own) would arguably be flawed by reason of it not containing any reasons for the decision (albeit the Tribunal would still have dismissed this appeal on the basis that it is inevitable that the same conclusion would be reached if the decision was taken again). However, we are of the view that any defect caused by the initial failure to give reasons was cured by the giving of reasons in the review letters.”

In Sanleo, Lady Mitting also said this:

“20.

It was accepted by Mr. Mansell that the tribunal was considering not only the original Notices of Requirement raised by Mr. Reeves but the entire decision making process, culminating in the review letter of Mrs. Ogburn.  It follows from this that we are looking at the complete process and have to be satisfied also that Mrs. Ogburn’s decision to uphold the Requirements was a reasonable decision, reasonably taken…”

We agree with the proposition made in Southend No. 2, Bluechipworld and Sanleo that whilst the decision appealed against is the original decision, the whole decision-making process is to be taken into account and so the appeal is against the original notice as it stands in the light of the review. We consider that HMRC’s review is, in essence, the kind of “reconsideration” of the requirement which was contemplated by Dyson J in Peachtree and, therefore elements of the review decision are as susceptible to review by the Tribunal as the original decision taken by HMRC. 

With those rather basic and self-evident principles in mind, we turn to the circumstances of this appeal:

In summary, the Appellant has had periods of non-compliance with paying VAT and CIS obligations for a number of years. It appeared from the information held by HMRC that the debt for one HoD in the Appellant’s business had been paid by underpaying the tax for the other two HODs, causing a debt to accrue on those. As it was considered that the Appellant was at risk of failing to pay its CIS deductions, in November 2022 the Campaigns & Projects (“C&P”) Securities Team issued a letter warning of in respect of the NoR. The Appellant had made payments to reduce the CIS debt making the NoR for those HoDs inappropriate at that time. Debts began to accrue again through late 2023 and early 2024.

The NoRs were issued on 20 May 2024. We are satisfied that at the time that the NoRs were issued, the Appellant had accumulated considerable debts. The VAT NoR was in the following terms:

“This letter is a notice to give security.

We require Lonsdale Property Development Limited to pay us security for the VAT amounts shown below.

This is because we believe there is a risk that Lonsdale Property Development Limited will not pay the VAT that is, or may become, due.

Amount of security for VAT: £118,082.34

Date security due: Immediately

Period of time we will hold the security for: 24 months.”

The CIS NoR was in the following terms:

“This letter is a notice to give security. We require Lonsdale Property Development Limited to pay us security for the Construction Industry Scheme (CIS) deduction amounts shown below.

This is because we believe there is a risk that Lonsdale Property Development Limited will not pay the CIS deductions that are, or may become, due.

Total amount of security required: £147,536.15

Date security due: 29 June 2024

Period of time we will hold security for: 24 months.”

It is clear from the NoRs that the date that the security was due in relation to VAT was “immediately” and the date that the security was due in relation to CIS was 29 June 2024.

In explaining the position that the Appellant was in, Mr Lonsdale states that from the moment that the Appellant began to run The Marian Anderson and The Duchy, both were making substantial losses. He adds that there were several reasons:

Mr Lonsdale further adds that he was awaiting the sale of some properties which would allow him to clear the debts.

In Highlake Ltd v HMRC [2016] UKFTT808 (TC) (‘Highlake’), Judge Anne Scott was of the view that the fact that the appellant (in that appeal) could not afford the level of security demanded was not a relevant consideration in relation to considering whether security is required for the protection of revenue, or the amount of security. Judge Scott also said this:

“…Whether a company is able to trade or not in view of the security requirement or amount is a consequence of the security requirement. The legislation is concerned with protection of revenue. It does not suggest that this objective is intended to be balanced against, or subject to, the objective of enabling the person upon whom the requirement is imposed to continue trading.”

The proximate cause of the defaults in this appeal was submitted to be an insufficiency of funds due to business matters. There is no suggestion that the Appellant stopped trading as a result of the problems it was facing. That Mr Lonsdale may have been protected by Mr Raffe from the problems that had been occurring in relation to the Appellant’s statutory duties in relation to tax is insufficient to absolve him of any responsibility in ensuring compliance with the Appellant’s statutory obligations in respect of VAT and CIS payments. This is because as a director, he would be expected to be aware of the Appellant’s financial and tax affairs. Chapter 2, Part 10, of the Companies Act 2006 (particularly ss 171 to 177) deals with directors’ duties. The general duties are based on certain common law rules and equitable principles as they apply in relation to directors, and have effect in place of those rules and principles as regards the duties owed to a company by a director. The duties include, inter alia, fiduciary duties. The director would be expected to be familiar with any records sent or received in relation to the company’s financial and tax obligations. As a director, Mr Lonsdale would have been required to be involved in the financial and tax affairs of the company.

HMRC submit that they advised Mr Lonsdale that if he could not pay the debts in full, a Time to Pay (“TTP”) arrangement could be agreed. We have, unfortunately, not had the benefit of seeing a transcript of the conversation that took place on 23 April 2024. Mr Lonsdale disputes that he was ever given the option to agree a TTP arrangement and adds that he would have taken that option if it had been given to him. Whilst there is a dispute as to whether HMRC informed Mr Lonsdale of the ability to request a TTP arrangement, we are satisfied that the duty to inform HMRC of any issues that may affect the ability of a trader to comply with their tax obligations falls squarely on the trader. Section 108 of the Finance Act 2009 relates to deferred payments during the currency of an agreement to that effect. The agreement must be reached prior to the default. This was not the situation that arose in the appeal before us.

The debts were subsequently paid in full by 9 July 2024.

As Mr Lonsdale’s principal submission was that the review officer failed to consider the fact that the debts were paid in full by the time of the review decisions. We have, therefore, considered the review decisions,

In the present appeal, whilst we did not hear oral evidence from the review officer, the review letters themselves provide a full explanation of what was taken into account in upholding the NoRs, including varying the amount of the NoRs. It is, therefore, clear that when varying the decisions, the fact that payment had been received was taken into consideration.

In respect of the VAT NoR, the review officer said this:

“The NoR was issued to you on the basis that you had failed to pay your VAT liabilities on time. I have reviewed your records, and I can see that you made large payments in May 2024 which put your account in a credit position and the VAT liability was paid in full.However, prior to this, HMRC had not received a payment from you since December 2023 and these payments failed to cover the VAT liabilities at that time.

You have further explained that the company comprises of a building business and two pubs. The pubs have been losing the company a significant amount of money and needed large investment to refurbish the pubs in the hope they will then become more profitable.

I appreciate the difficult situation you have faced in making your liability payments because of the investments regarding the pubs. You explained that money is anticipated from the sale of a property to be able to clear the outstanding liabilities with HMRC, with a predicted date for the funds to be paid. However, this is only an expectation and could be subject to delays as the property market can be unpredictable. You cannot rely on future funds in order to pay your VAT liability as you have done previously.

For the NoR to provide security to be withdrawn, HMRC must be satisfied that you do not pose a risk to revenue, and you will be able to meet your VAT liabilities on time. The non- compliance and non-payment have been reoccurring for a significant amount of time, up to the NoR being issued. Your pattern of late and non-payment poses a risk to HMRC. Therefore, based on the aforementioned information, it is my view that, Officer Lowery has acted reasonably and was correct to issue you with a NoR.”

The letter further stated:

“However, as you have now paid your VAT liabilities, Officer Lowery is prepared to reduce the amount of security required. She has detailed that she would accept six months security element at £73,500.00 for quarterly returns or 4 months at £49,000.00, if you wish to move to monthly returns.”

We are satisfied that within the review decision (in respect of the VAT NoR), the original decision to require security was upheld but because the debt had been cleared, the decision maker indicated a willingness to reduce the security amount.

Similarly, the CIS NoR review decision states that:

“I have no doubt that the company regrets being in this situation, and it is trying to arrange for payments of the debt. I sympathise that in the modern economic climate, companies and individuals can run into significant cash flow problems. However, it does not change the fact that there are tax debts outstanding to HMRC. These tax debts are such that the company is merely a custodian for and is obliged to be passing these payments onto HMRC on another’s behalf. A company should not be easing its cashflow issues by failing to pay HMRC in full and on time. The company has shown a pattern of non-compliance with its obligations where it can be seen these debts have been outstanding for some time. Where one HOD has been paid off, debts accrue under the remaining two HODs. Where such debts remain outstanding for periods of time, legislation empowers HMRC to request security. Such securities are there to protect revenue, and by extension provide fairness for taxpayers who do pay their tax debts on time.

One of the conditions that would discharge a NoR would be fully paying the debt before the due date of the NoR. I note that at present, the CIS debt remains unpaid in full despite the claim in the appeal that it will be paid by end of June 2024.”

The review officer also said this:

“As of the date of this letter, I note that the CIS debts have now been fully paid. However, I still conclude that security is required in respect of CIS.

HMRC normally hold security for 24 months. During this time the company’s tax affairs will be monitored. The security may be returned to the company earlier than 24 months if HMRC believes that the company is no longer at risk of not paying the CIS deductions due. If there is a change in circumstances after providing the security and the company has information that may alter the decision to hold security, the company can ask HMRC to review the position.”

With regard to the CIS NoR, the decision to require security was upheld and the amount reduced to reflect the fact that the current CIS liabilities had been paid in full. The reviews also allowed for the security to be returned earlier than the usual 24-month period if HMRC believed that the Appellant was no longer a risk of not paying VAT and CIS deductions when due. We are, therefore, satisfied that whilst the review officer referred to the unpredictability and the delays in the property market, the review officer was aware that the debts had been paid in full and considered this fact. Whilst it might not be desirable that payment of the outstanding debts did not change the security required, we are nevertheless satisfied that the review officer did not disregard any relevant consideration in conducting the review. In particular, the review officer was aware of the payment of the outstanding debts by the time of the review decision(s).

It cannot, therefore, be said that HMRC acted unreasonably in reaching the conclusion that security in the terms of the NoRs was “necessary for the protection of the Revenue” on the facts of this appeal. The payment of the arrears does not affect this as it is plainly incapable of curing the lateness of the payments. Furthermore, we have found that the review officer did not fail to take into account any relevant matters. The purpose of a security is not to collect the arrears. Indeed, the combination of the repeated lateness and the repeated warnings provided strong grounds for the need for the protection of the Revenue in this appeal. In Swann v HMRC [2020] UKFTT 176 (TC) (‘Swann’), the FtT upheld HMRC's decision based on the risk posed by the company’s non-compliance.

We have considered the statutory provisions and requirements in respect of VAT and CIS. The collection and management powers of HMRC are found at s 1 of the Taxes Management Act 1970 (“TMA”) and s 5 of the Commissioners of Revenue & Customs Act 2005 (“CRCA”). The scope of those powers was described by Lord Hoffman in R v HMRC ex parte Wilkinson [2005] UKHL 30, at [20] to [21], as follows:

“[20] Section 1 of TMA gives them what Lord Diplock described in R v Inland Revenue Commissioners, Ex p National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617, 636, as

‘a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection.’

In R (on the application of Davies & Anor) v R & C Comrs [2011] STC 2249, the Supreme Court considered the discretion in HMRC’s duty of management. Lord Wilson said this, at [26]:

“The primary duty of the Revenue is to collect taxes which are properly payable in accordance with current legislation but it is also responsible for managing the tax system: see s1 of the Taxes Management Act 1970. Inherent in the duty of the management is a wide discretion. Although the discretion is bounded by the primary duty (see R (on the application of Wilkinson) v IRC [2005] UKHL 30 at [21], [2006] STC 270 at [21], [2005] I WLR 1718 per Lord Hoffman…”

The legislation, therefore, makes provision for the actions of HMRC in respect of the collection of taxes and management of the system relating to the collection of taxes.

For all of the foregoing reasons, the appeal is dismissed. These findings are not to suggest that the Appellant deliberately sought to evade taxes, but are a balanced appraisal of all of the information before us on whether the decisions were reasonable.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.